Are We Lying to Ourselves About Our Pension Problems?

Private pensions are underfunded and fading away, and the agency that insures them is itself running a record deficit. Now we learn that pension funds covering public employees are more seriously underfunded than previously believed.

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The news just keeps getting worse as it relates to retirement security. Private pensions are underfunded and fading away, and the agency that insures them is itself running a record deficit. Now we learn that pension funds covering public employees are more seriously underfunded than previously believed.

There’s nothing dramatically different about the way public pensions are being run. But, as reported this week in The New York Times, the Governmental Accounting Standards Board is changing the bookkeeping rules. It seems we’ve been lying to ourselves about retirement security for years, and the board wants new pension plan reporting to reflect reality. The new rules do not hit in full until 2015. But already we can see what they will show.

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As of 2010 and under current accounting rules, public pension plans had 76 cents for every dollar they must pay retirees in the future, according to an analysis by the Center for Retirement Research at Boston College. Under the new accounting rules, cash on hand would be just 57 cents on the dollar—nearly twice the shortfall.

The new rules won’t change the underfunded status of all public pensions—only those that are running such a large deficit that they are all but certain to need to borrow money to make good on their obligations. The plans must now account for those future borrowing costs, which translates into strikingly higher deficits.

According to The Times, hardest hit public pension plans will be those in Illinois, New Jersey and Kentucky. But many states will feel the sting, and plans covering teachers will be among those most adversely affected. Many states have failed to make sufficient contributions to pension funds to counter for the terrible investment returns of the past dozen years. They’ve been kicking this problem down the road for at least a decade.

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How big is the problem? Here’s an excerpt from a Harvard Kennedy School paper:

“Across the United States, state and local government-sponsored pension plans are in trouble. They are dangerously underfunded to the extent that their assets are unable to meet future liabilities without either outsize investment returns or huge cash infusions. Over the past several years, estimates of the total size of the public pension problem in the U.S. have ranged from $730 billion in unfunded liabilities to $4.4 trillion. Many financial economists believe that the true size of the total unfunded liability lies closer to the larger estimates than it does to the smaller.”

The private pension side of things is a mess too. Total underfunding is somewhere around $500 billion. Meanwhile, many companies have eliminated private pensions altogether. The Pension Benefit Guaranty Corp., a government agency, backstops the private pensions of 44 million workers. But in its latest annual report the PBGC showed a record shortfall of $26 billion. That’s the difference between assets on hand and obligations. It raises the question: Who will insure the insurer?

What does all this mean to you? Most pension plans, both public and private, remain on firm ground. But many do not. You cannot be certain the benefits you’ve been promised will be there. Already, public pensioners in Prichard, Ala., have lost their income. Plenty of private pensions have gone bust too, and while the PBGC picks up the tab its maximum payout to individuals is $56,000 a year. Meanwhile, the PBGC’s ability to pay in the future is in question. It’s time to stop lying to ourselves about our safety net.

MORE: Why We Need Pension Reform

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